Thesis

The most important part of trading is the training of one’s mind and emotions. Often traders will cut their profits short and try and reason their way out of a drastic loss, instead of letting their winners run and cutting their losers off at the knees. The way to tackle this is the same way athletes train their minds. A basketball player can make 50 shots in a row but the question is if it’s game 7 of the NBA playoffs, can they even make 2 shots in a row? The same applies to trading where someone can do well with low volume trades or paper trading, but once the trade is placed and the market’s volatility takes hold, do they have the emotional control and discipline to adhere to the rules of their trade (honoring their stop loss and letting their trade reach its profit target).

Following the same mental training programs athletes use will give us those closest analog to what we must undergo, piggybacking off the multi-millions of dollars of research that go into their programs.

Sports Psychology

According to the Ohio Center for Sports Psychology, there are 9 mental skills for successful athletes, which are as follows:

1. Choose and maintain a positive attitude.
2. Maintain a high level of self-motivation.
3. Set high, realistic goals.
4. Deal effectively with people.
5. Use positive self-talk.
6. Use positive mental imagery.
7. Manage anxiety effectively.
8. Manage their emotions effectively.
9. Maintain concentration.

These ladder up to what is known as the Performance Pyramid, which are broken down as follows:

• Level I - These mental skills constitute a broad base for attaining long-term goals, learning, and sustaining daily practice. They are needed on a day-by-day basis for long periods of time, often months and years.
• Level II - These skills are used immediately before performance to prepare for performance. They maybe used just before competition begins, or immediately before a specific performance action, such as a golf shot or a free throw in basketball.
• Level III - These skills are used during actual performance behavior.

Trading Psychology

How does the principles of sports psychology match with that of trading?

Level I → Choose and maintain a positive attitude

• Realize that attitude is a choice → Often during trading we let a large loss place us in immediate despair or a large win into a state of euphoria. Either approach is the wrong one — staying even keel during trading is the way of the professional and that starts with the realization that attitude is a choice. Marcus Aurelius states that our experience is life is merely a culmination of our response to things — the same must apply with trading: if we choose to characterize every moment as a learning experience and truly make an effort to learn from it, then what has happened was meant to happen on your path to becoming a consistently successful trader. Therefore remaining positive during moments that cause you pain is the champion’s mindset and should be the de facto choice.
• View their sport as an opportunity to compete against themselves and learn from their successes and failures → If you don’t learn from your mistakes you’re bound to repeat them again. It’s important to have range in trading, but start with the basics and continue to optimize the setup until you increase your success rate. Yes, the stock market is a zero-sum game and you are competing with other traders out there, but there’s no point in thinking you are competing against others. The market should not be personified, it merely is. Therefore the only thing you can control is reading the market and flowing with the market, thereby competing only with yourself on every execution.
• Pursue excellence, not perfection, and realize that they, as well as their coaches, teammates, officials, and others are not perfect → There doesn’t exist a day trader who always wins on every trade and never loses. Therefore we must be comfortable with the fact that we will have losing trades but that it isn’t indicative of who we are. There are several factors that can go into why you may not be performing your best, but when it comes down to it, you must ask yourself if most traders are “ordinary”, then what must one do — what must one BE, in order to be “extra-ordinary”. Joseph Campbell devised what is known as the “hero’s arch”, and no good story is devoid of it. You must experience the down moments where you feel at your lowest in order to make your triumph. No one is perfect, neither are you, so realize that a setback is only a setup for a comeback.
• Maintain balance and perspective between their sport and the rest of their lives → It might be tempting to take larger positions in order to increase your profits faster, but unless you have proven to yourself that you have the emotional resolve and the technical execution with your ideal setups, then it isn’t worth risking depleting your account. Ideally you have another income stream while trading, but if you don’t then it isn’t worth risking the livelihood of yourself and your family in order to “gamble” on the market. Be realistic about what your daily profit targets are and try not to bite too much out of the market. If you hit your trading goal within the first hour, then walk away and end your day so you can enjoy the rest of it. It isn’t worth the extra dollar to continue trading and getting the gift of time back is priceless. Perhaps you’re deep in the red, take the necessary (slow) steps to dig yourself back out. If you think one mega trade is what it will take to save you, then you’re no longer trading — you’re gambling.

Level I → Maintain a high level of self-motivation

• Are aware of the rewards and benefits that they expect to experience through their sports participation → While traders expect to earn profits from the effort they put in, there are also some intrinsic rewards that aren’t often discussed. For one, the way you operate in the world of day trading is entirely different than the world we grew up in. The market can take all your profits at once, and they can give it back. Sticking with a losing trade to show perseverance doesn’t hold the same admiration as it would in the real world, it’s wiser to be more pragmatic about the trades you have on hand and reading the market dynamics. You also learn to control your emotions better than you would outside of trading. If you’re working a traditional 9-5, there’s no immediate feedback when you do or don’t handle your emotions well. But in trading, not handling your emotions well can result in instant loss of profits. There’s no other place where handling your emotions is most needed than in trading.
• Are able to persist through difficult tasks and difficult times, even when these rewards and benefits are not immediately forthcoming → This runs at the heart of every trade. Traders often have their periodic slumps and sometimes this can last a year, resulting in about 95% of traders giving up after their first year. While holding onto a losing trade isn’t a great example of perseverance, holding onto trading as a sport after continually getting beat in the market (so long as you’re learning and not shooting from the hip) is an admirable case of perseverance.
• Realize that many of the benefits come from their participation, not the outcome → Just as we mentioned above, even on days where you’re losing, a positive attitude can change this from a “losing day” to a “learning day”. The more you lose and lose in different ways, the more you can intuit what went wrong when entering the trade so you can better jive with the market. It’s the daily participation in the markets that truly reap the benefits.

Level I → Set high, realistic goals

• Set long-term and short-term goals that are realistic, measurable, and time-oriented → You can claim you want to make $3,000/day in day trading and while that’s an admirable goal, you need to refine your focus towards something more reasonable. If you’re truly happy with making $300/day in your first year, set that as the target where exceeding that amount in the day is the signal to close your computer and enjoy the rest of the day. The same goes for what level of loss you are willing to accept. Remember, the goal is to become consistent in your trading with a high success rate before you up the ante. Every time you do, it gets progressively more difficult as your emotions come into play with higher stakes.
• Are aware of their current performance levels and are able to develop specific, detailed plans for attaining their goals → The reason it’s so important to keep a trading journal and to analyze your trades is to understand where exactly your weaknesses are. For me, the difficulty was that even though I had a high success rate, I kept letting my losing trades take large bites out of my profit. Rather than getting out of the trade at my defined stop loss, I continued to let it run and when it did, every time it went lower I would wait until it retraced, even though at times it rarely did retrace. Knowing this, a good action plan would be to practice making trades with a defined stop loss and honoring them, until you became good enough at it and see if it improves your performance. This is the only way you will be able to improve your game, when you inspect it with a fine tooth comb.
• Are highly committed to their goals and to carrying out the daily demands of their training programs →

Level I → Deal effectively with people

• Not really applicable.

Level II → Use positive self-talk

• Maintain their self-confidence during difficult times with realistic, positive self-talk.
• Talk to themselves the way they would talk to their own best friend
• Use self-talk to regulate thoughts, feelings and behaviors during competition.

Level II → Use positive mental imagery

• Prepare themselves for competition by imagining themselves performing well in competition.
• Create and use mental images that are detailed, specific, and realistic.
• Use imagery during competition to prepare for action and recover from errors and poor performances.

Level III → Manage anxiety effectively

• Accept anxiety as part of sport.
• Realize that some degree of anxiety can help them perform well.
• Know how to reduce anxiety when it becomes too strong, without losing their intensity.

Level III → Manage their emotions effectively

• Accept strong emotions such as excitement, anger, and disappointment as part of the sport experience.
• Are able to use these emotions to improve, rather than interfere with high level performance

Level III → Maintain concentration

• Know what they must pay attention to during each game or sport situation.
• Have learned how to maintain focus and resist distractions, whether they come from the environment or from within themselves.
• Are able to regain their focus when concentration is lost during competition.
• Have learned how to play in the “here-and-now”, without regard to either past or anticipated future events.